Thanks to the Fed, savers take it on the chin
As a financial adviser, you can count on human nature to indicate where you are in the investing cycle. As the summer progressed and the stock indices marched steadily higher, people began asking why we had not revved up the engines to full speed. We read about new young investors opening accounts and wondering why they need a day job. Never a good sign.
But everyone knows you should not fight the Fed – the Federal Reserve Board Open Market Committee, that is. Long ago, it had one task, that of keeping the dollar stable. Now it has a dual mandate: first, to give lip service to a stable dollar, and second, to print lots of money or do whatever else it takes to help the U.S. achieve full employment.
Its current strategy is to make borrowed money so cheap that you are a buffoon to keep it in the bank at nearly zero interest. What should you do with it? Why, invest it in the latest and greatest new companies’ stocks promising to solve all of our problems. Fed to public: We no longer need your trillions of dollars saved and kept in safe places.
What does this strategy produce? Tesla comes to mind immediately. What could be more popular than the darling green car company producing great style? It has taken its investors on a great ride (pun intended). Since Sept. 20, 2019, its stock price had risen 833 per cent through Monday.
Meanwhile, Dish Network (DISH) sits in the median spot of 4,652 stocks in that period. It lost 13 percent. The worst performer was Top Ships Inc. (TOPS), down over 98 percent in value. The losers have a lot of friends because 64 percent of this list have lost value from one year ago. Only roughly a third are higher.
Back to our star though. Best things going for Tesla are that it is now profitable, earning 10 cents per share last quarter, and in the past five years, sales are growing at an average of 49 percent per year. After those two, you need to look under the hood, or wherever the engine is.
For housing values, you look at comps in the area. Here let’s look at GM and Ford. If you were Midas, you could buy all shares of Tesla for $409 billion, down recently from about $450 billion. Or you could buy GM at $45 billion and Ford for $28 billion – both. You would have 82 percent of your money left for other things. While true that Ford is highly leveraged and losing money this year, it has $130 billion in annual revenue compared with Tesla’s $25 billion. GM has over $115 billion in revenue.
The PE ratio is also interesting. That is the amount of stock price one has to pay for $1 worth of company profit. That of Tesla is 521 times the dollar, while GM is only 23 and currently Ford is -11. At least Ford’s stock price is cheaper than its book value per share.
With Mr. Market at least temporarily valuing Tesla and others at such sky-high measures, we are not surprised that the stock market indexes are falling, no matter how much free money there is in circulation. When one throws in potential regime change that may punish capitalism, certainty is in very short supply. For now, we are cautious and favor holding some cash for future purchases that might get a lot cheaper. Never a dull moment!
(Past performance is no guarantee of future results. Advice is general in nature and not intended for specific situations)
(Statistics from Worden Brothers, Inc., TC2000 software, 2020.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at firstname.lastname@example.org.